Archive

for August, 2014

August 2014 Economic Overview

Posted on 08/15/2014 in Construction, Economic Overview, Engineering - 0
Summary

While 2013 closed well, the ’14 winter punished the economy, construction markets, and design & construction service providers. The bounce back continues despite lingering unemployment and a volatile global economy. Fed tax receipts YTD are up 3.3% (individuals) and 15.6% (corporations), reducing the deficit. Mid-term elections halted all but the most critical legislation. Single-family housing is improving in the face of moderate headwinds. Domestic oil & gas continues big growth and the energy/utility construction market is feeling the pressure through additional projects, faster schedules, and labor shortages. The Fed’s bond buying fell to $35B per month from $75B yielding inflation trending toward the 2.0% target. Continuum’s forecast of a short and shallow recession during early 2015 persists, although it is less likely. All in all, risks are modest and economic progress is positive, slow and steady.


General Economy

  • 1Q’14 GDP growth revised down to dismal -2.9% due to hard winter; Economists expect 2Q’14 improvement and strong finish to 2014
  • Consumer confidence at highest level since ’08-’09 recession; Auto sales at eight-year peak; Employment trending upward
  • Continued Fed tapering may lead to rise in interest rates during 3Q/4Q’14; Unexpectedly rates fell during 2014 YTD

Unemployment

  • 288,000 new jobs in June; Unemployment to 6.1%, a new low since ’08; Labor participation rate is falling, low, and problematic
  • 3.1 million long-term unemployed (> 27 weeks) is highest rate of long-term joblessness since World War II
  • June construction unemployment is down to 8.2% from a high of 27% in February ’10
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Political Environment

  • $130B deficit for May ’14 is 9% improvement from May ’13; Spending cuts and increased tax revenues expected to push deficit projections lower to close out 2014… deficit spending to continue based on President’s 2015 budget
  • High-stakes midterm elections loom; Look for executive action (minimum wage increase, etc.) to be a top issue

Finance & Banking

  • Continued tapering of Fed bond buying to $35B per month (vs. $75B in Jan 2014); End to bond buying by 2015
  • Liquidity extremely high driving high equity returns on top of a fantastic 2013; Equity gains YTD: DJI +2.7%; S&P 500 +7%; NASDAQ +6.6%; 10-year UST yield (2.6%) trending down YTD and was unplanned and unexpected
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Surety

  • 2014 YTD losses flat; Overall, multi-year results are unprecedented and highly positive attracting new surety companies to market
  • Soft market, loosening underwriting, higher capacity, and competition on indemnity are accelerating for surety providers and making it easier for contractors to obtain bonding support
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State & Municipal
Agencies

  • Balanced budgets, spending constraints, and tax revenue growth are placing many states and cities on more solid financial footing
  • Municipal bonds returned 3.2% in ’14 (vs. 2.6% in ’13) attracting wary investors given high-profile trouble in Detroit and Puerto Rico

Global Competition

  • China – 7.5% 1Q’14 GDP growth is 18-month low; Industrial and mfg’ing growth offset by intentionally slowed residential market
  • Brazil – World Cup was a great success despite all of the issues leading up to it… now on to preparation for 2016 Olympics; Central bank benchmark interest rate remains at hefty 11%; economists expect GDP growth of 1.3% in ’14 and 1.5% in ’15
  • Brazil – World Cup was a great success despite all of the issues leading up to it… now on to preparation for 2016 Olympics; Central bank benchmark interest rate remains at hefty 11%; economists expect GDP growth of 1.3% in ’14 and 1.5% in ’15
  • India – New government in May focused on kick-starting Indian economy reeling from recession
  • Russia – Ukraine sanctions are more targeted and severe with less negative bleed over on European Union
  • Russia – Ukraine sanctions are more targeted and severe with less negative bleed over on European Union
  • European Central Bank offers 0.25% loans to commercial banks to spur lending in Eurozone nations and hope to accelerate growth
  • Syria/Iraq debacle & Hamas/Gaza/Israel conflict raises fears and long-term diplomatic risks but short-term US impacts are minimal

Residential
Building

  • Mixed signals for single-family construction: starts dropped 6.5% in May, while single-family permits jumped 3.7%
  • 30-yr fixed mortgage remains in low 4% range; mortgage rates flat through 2014
  • Mixed signals for single-family construction: starts dropped 6.5% in May, while single-family permits jumped 3.7%
  • NAHB Multifamily Production Index suggests positive market conditions for ninth consecutive quarter… supported by rising cost rental market and very low interest rates; constrained by labor, resource, and land availability
  • Growing interest by institutional investors in residential rental property-backed bonds; Blackstone, KKR, Cerebus already in market
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Construction Economy

  • Construction spending growth continues versus ’13 figures with fastest growth in Power, Office, and Lodging, slowest in Healthcare, Sewage & Waste Disposal, and Communication
  • 1Q’14 GDP slump linked to harsh winter yields continued and tempered growth in construction markets for remainder of the year
  • Skilled trades in Energy, Power, Industrial and Residential construction sectors are driving higher labor costs and slowing pace

Construction M&A

  • 1Q’14 construction M&A activity driven by smaller number of large deals; AMEC acquired Foster Wheeler for $3.3B
  • Parsons Brinckerhoff, currently owned by Balfour Beatty, is in play and will likely close in late 2014
  • Toll Brothers’ completes acquisition of Shapell Industries in 1Q’14
  • Continued merger activity in the energy and utility sector (Wis. Energy Corp. and Integrys Energy Group announced merger) serves as a driver for design and construction firms serving these markets to seek growth through acquisition
  • High public equity values and cheap debt yield strong acquisition currency; Expect active M&A market through 2014; Eventually, Fed tapering, monetary policy, and rising interest rates will increase borrowing costs, reduce valuations, and lower deal multiples

Power
Construction

  • Power construction market is the best performing market and the long-term prospects remain fantastic; Domestic natural gas output hit alltime high in June 2014, expect another high in July – is a driver of pipeline, gas processing, LNG, and power gen construction activity
  • MA is first state to issue grid modernization orders; Will drive electric T&D overhead and underground markets

Telecom
Construction

  • Global IT spending revised downward for second half of 2014, still expected to grow by 2.1% year-over-year
  • 2014 state/municipal IT spending focused on data center consolidation, cloud services, and enterprise information security
  • Google’s push & other provider’s response to develop higher speed infrastructure will drive boom in telecom construction in 2015/2016

Utility Contractor Financial Performance

  • Energy and utility contractors continue to thrive with growing markets driving growth and reasonable margin achievement…as an example, many of our clients in this space are 50-100% larger vs. 2010 and achieving equal or higher margins
  • Resurgence of local electric T&D markets will boost small to medium sized firms vs. the largest publicly traded utility contractors

Construction Raw Materials

  • Overall construction materials prices are up ~1.6% over the last 12 months, while crude oil is up more than 3% in the same period
  • Lumber prices continue their volatile rise through mid-2014, driven primarily by short supply, higher demand in residential construction

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Construction Raw Materials

  • Overall construction materials prices are up ~1.6% over the last 12 months, while crude oil is up more than 3% in the same period
  • Lumber prices continue their volatile rise through mid-2014, driven primarily by short supply, higher demand in residential construction



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